26 February 2019

With Brexit uncertainty dragging on, Vicky looks at trends within the housing market so housing associations can plan ahead.

The Centre for European Reform has recently calculated that between the referendum vote in June 2016 and the end of the third quarter of 2018, GDP was already some 2.3% below where it would otherwise have been. The government has had to borrow considerably more than it would otherwise have had and that is constraining its ability to invest heavily in housing which is crying out for more public housing to be built. Businesses have been reluctant to invest in view of uncertainty regarding the final trading arrangements with the EU with falls in business capital expenditure in each of the 4 quarters in 2018. Business optimism at the end of last year had fallen to the lowest in 2 years.

It is not surprising that in this environment house prices have been under pressure, with London particularly badly hit. The latest RICS survey suggests that prices overall had been in negative territory in each of the last four months of 2018 and the level by December was at its weakest since August 2012. Although real wages are rising at last after a long period of pressure on disposable incomes, many of the new jobs created before and after the referendum have been in areas of low pay and low productivity. That is affecting willingness and ability to borrow and spend by over-indebted households, also now fearful of further interest rate increases. Estate agents are reporting the lowest level of sales per broker since the financial crisis.

The Bank of England bank stress tests which factored in a 33% drop in house prices in the case of a disorderly Brexit cannot have helped. Consumers are generally more cautious. Unwillingness and/or inability to pay has also been affecting the rental sectors with private rents up only 1% in the year to December 2018.

For housing associations which, according to the IFS, will by 2020 have to cope with charging rents some 12% lower compared to where they would have been without the requirement by the Welfare and Work Act to reduce rents by 1% a year since April 2016, the additional impact of lower or declining house prices could be significant. In the event of a disorderly exit, the prospect of declining GDP and rising unemployment would add extra demand pressure for social housing while reducing revenues and reducing the scope for cross subsidisation. It would also impact on development plans. Moody’s last year calculated that flat or slightly falling house prices would cut sales housing associations revenues by some £63m in the financial year 2019/20 and be significantly higher if the drop was similar to that in the last financial crisis. Not surprisingly this would be particularly felt in London where sales accounted for 24% in revenues last year as against 8% nationally.

By contrast regions such as the East and West Midlands saw prices in the year to November 2018 rising by 4.4% and 4.6% respectively.

At present, withdrawal negotiations still hang in the balance. But even on the assumption of a relatively benign exit the Bank of England has downgraded its forecast for the economy to just 1.2% in 2019 and 1.5% in 2020. Of course things could be worse on alternative scenarios. Nevertheless on the assumption of a smooth transition CEBR expects house prices across the UK to still rise by 1.7% in 2019 and 2.9% in 2020.

But regional variations and hence impact on housing associations will remain. Latest prices in inner London were 1.5% lower in November from 12 months earlier and in outer London by 0.8% lower. By contrast regions such as the East Midlands and West Midlands saw price increases of 4.4% and 4.6% respectively. For this year London is expected to see a further 0.4% fall. On the other hand the East Midlands, the West Midlands and the North West will see rises of 2.4%, 2% and 2.4% respectively.

This may perhaps suggest that housing associations with a wide regional reach would at least be able to achieve a better balance in their finances whatever the Brexit outcome.

Join Vicky at Housing Finance Conference and Exhibition to hear more about the global economy and its impact on housing associations.

Vicky Pryce is Chief Economic Adviser at CEBR and former Joint Head of the UK Government Economic Service

Vicky is an economist and former joint head of the UK’s Government Economic Service. She is currently chief economic adviser with the consulting firm CEBR. She was previously senior managing director at FTI Consulting, director general for economics at the Department for Business, Innovation and Skills (BIS) and joint head of the UK Government Economics Service. Before that she was partner and chief economist at KPMG and previously worked in banking and the oil sector. She has held a number of academic posts, is on the Council of the Institute for Fiscal Studies, on BIS’ panel for Monitoring the Economy, on the City AM’s shadow monetary policy committee and on the advisory board of the central banking think-tank OMFIF. She co-founded GoodCorporation, a company set up to promote corporate social responsibility and in 2010-11 became the first female Master for the Worshipful Company of Management Consultants.

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